Industrials have been my favorite sector for the fourth quarter of this year; my latest recommendati...
Power Up with Engine-Maker Briggs & Stratton
09/26/2017 5:00 am EST
Briggs & Stratton (BGG) is the world’s largest producer of gasoline engines for outdoor power equipment, and is a leading designer, manufacturer and marketer of power generation units, job site products, pressure washers, lawn and garden care products, explains Jack Adamo, editor of Insiders Plus.
Briggs & Stratton just finished its fiscal year which saw operating income rise 110%, pre-tax income rise 125% and net income rise 113%, despite a 161% higher income tax bill.
EPS of $1.31 were up 118.3%. They were helped a little by buybacks, but unlike most of buybacks done these days, the stock was purchased at bargain prices, averaging $19.77 per share. The stock is trading with a trailing P/E multiple of just 16.
That said, this recommendation is not a slam-dunk. The company is broadening its product offerings to diversify its revenue streams, and it's making good progress, but currently the business is very cyclical and seasonal.
Seasonality isn't a huge problem, but with some parts of the housing market slowing down and worldwide GDP growth weak, we could be nearing a short-term peak for this industry.
The company is not oblivious to this possibility; aside from broadening its product lines, it has undertaken an optimization program supporting profitable growth.
The savings will build over a three-year period beginning in fiscal 2019, and total pre-tax expenses related to the program are expected to be approximately $50 million to $55 million.
Of that, $24 million to $28 million is expected be recognized in fiscal 2018. So, it's a great project, but will be anti-accretive to earnings in the coming fiscal year, after which its results should favorably impact the bottom line for all future years.
Despite the big jump in earnings, Briggs & Stratton shares fell after its earnings announcement because its 2018 guidance called for flat to modest growth in GAAP earnings, due to the above-mentioned program costs.
B&S expects 2018 EPS between $1.31 and $1.48. This guidance specifically excludes unpredictable hurricane costs. Typically, such disasters are negative for GDP in the first quarter they occur, then they boost it in following quarters, as damaged and destroyed assets are replaced.
I'm actually more interested in B&S's possible sales growth overseas; it has plenty of room for growth, and with the dollar still weakening, overseas growth should accelerate.
Most of Briggs' foreign sales currently come from Europe, but it also sales and service subsidiaries in Australia, Brazil, Japan, Malaysia, Mexico, New Zealand, Russia and South Africa, as well as a manufacturing plant in China.
I also like the stock's technical action. Despite the recent price tumble, the shares have improved steadily over the last two weeks and its on-balance-volume has recovered and risen above its pre-earnings announcement level.
I like the low P/E and the risk-to-reward ratio the possibilities of foreign sales growth provide. Given the phase of this business cycle, I'm considering this a speculative buy, despite the company's financial strength. We also pick up a 2.6% dividend yield while we wait.
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